As per a recent news report1 , as on 30th June 2022, a total of 1,999 CIRPs are ongoing out of which 436 are in the Real Estate Sector. This means, almost 1/4th of the Companies undergoing Insolvency are Real Estate Companies. In the wake of the aforesaid post-covid statistics and the general slowdown in the distressed assets market, the judgment of the NCLAT in the case of Victory Iron Works Limited Vs. Jitendra Lohia Resolution Professional of Avani Towers Pvt. Ltd.2 holds significance and will impact every real estate company undergoing insolvency. The NCLAT in this judgment has, following the judgment in Rajendra Bhuta, held that:
"It is also undisputed fact that the Corporate Debtor (In CIRP) is holding the development right and the Development Agreement dated 16.06.2008 has not been terminated before the commencement of CIRP. In all such situations Section 14 of the Code is applicable till it reaches the stage of approval of Resolution Plan or Liquidation. However, the RP is to appropriately disclose the status of the Property in the Information Memorandum and other documents as required in the CIRP Regulations, 2016."
In this case, one of the Appellant, M/s. Energy Properties Pvt Ltd., was the land owner ("Land Owner"), who had purchased the property in question situated somewhere in Howrah ("Property") from a SARFAESI sale. The Land Owner and Avani Towers Pvt. Ltd. ("the Corporate debtor") had entered into a Memorandum of Understanding ("MoU") whereby the Corporate Debtor was granted development rights to develop the Property. The fact that the MOU was not terminated by the parties, was undisputed. It is also relevant to note, that there was a Memorandum recording possession that was entered into between the Corporate Debtor and the Land Owner (appellant) whereby the Corporate Debtor was put in possession of the Property.
Briefly, it was contended by the Land Owner that the Corporate Debtor had not even acted upon the Development Agreement for years and had infact got in a licensee into the property by executing a leave and license agreement in favour of another company. On the basis of this, the Land Owner made an application before the NCLT Kolkatta bench and sought to recover exclusive possession of the Property. The RP contended that under Section 25(2)(a) of the Code the RP is duty bound to take control of the assets of the Corporate Debtor and such assets include all the tangible and intangible assets including possessory and development right. The Property was an intangible asset of the Corporate Debtor, and the same ought to be protected under section 14 of the IBC, or else the entire purpose of the CIRP would be frustrated.
The NCLT, Kolkatta Bench, in its judgment observed that:
"Corporate Debtor is having development rights to the properties. It is intangible assets of the corporate Debtor. RP holds same development rights relating to those properties. He has to proceed with the CIRP of the Corporate Debtor and invite resolution plan on the basis of those rights. The respondents cannot obstruct his possession and activities in any manner. Hence, we allow this application i.e. CA(IB) No. 1807/KB/2019"
With the aforesaid observation, the NCLT Kolkata bench, disposed off the applications with the following order :
"The Respondent (or any other person acting through them in CA(IB) No.1807/ KB/ 2019) shall not obstruct RP's possession and his activities relating to CIRP of the Corporate Debtor, until further orders, failing which the local police are directed to give every assistance to the RP for completion of CIRP of the Corporate Debtor effectively."
Thereafter, the Land Owner proceeded to challenge the aforementioned order of the NCLT before and the NCLAT dismissed the appeal thus restraining the Land Owner from recovering the possession of the Property from the Resolution Professional during insolvency.
The observations in the aforesaid judgment make it clear that no entity, not even the actual owner of an immovable property, can recover possession of that property, if development rights in respect of that property have been given to a company, which in turn goes into insolvency. The only prerequisite that appears to emerge, is that the agreement granting these development rights must not be terminated.
However, an important question arises out of this proposition which still remain unclear:
What happens in a situation where the development agreement granting the development rights has been terminated by the land owner vide a termination notice or a suit, but the same is disputed by the Corporate Debtor. In this situation, where the development agreement is terminated, and the same remains under challenge, the suit for termination filed by the land owner would also stand stayed post admission of insolvency under section 14 of the IBC against the Corporate Debtor. In such a situation, what will be an appropriate forum to decide whether the termination was valid?
Development rights in insolvency are integral to every company in the business of Real Estate, and the judgment in Victory Works can be utilized as an important judicial precedent that addresses the preservation of these rights during insolvency. While it has, to some extent provided much needed clarity, there are a few aspects of these rights that ought to be examined and clarified by the courts of India.
2.(2021) ibclaw.in 185 NCLAT
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